During the FSA’s ninth cryptocurrency study group meeting last week, officials discussed regulatory measures for cryptocurrency wallet services, including the maintenance of internal control systems, management of cryptocurrencies belonging to the service providers and customers, audits of financial statements, publication of policies in the event of stolen funds in a hack, and maintaining funds to repay customers.

Under Japan’s current fund settlement law, cryptocurrency-related companies, such as crypto exchanges, are required to register with the FSA. While wallet service providers handle large amounts of cryptocurrencies like crypto exchanges, they are not targeted by laws and regulations as they do not engage in buying and selling of cryptocurrencies.

However, since wallet service providers manage payments, the FSA believes that financial regulation is necessary. The FSA’s proposed regulatory measures will reportedly only target so-called “custodial” wallets under the control of third-parties. Software and hardware wallets will not fall under this regulatory framework. The regulation will reportedly be at par with the international standards for preventing money laundering and terrorism financing set by the Financial Action Task Force.

At the meeting, FSA officials also discussed the risks associated with wallet services, such as theft during cyber attacks, wallet failures, money laundering, and other risks shared by cryptocurrency exchanges. In addition, they also discussed the time period for introducing the new regulation. During this transitional period, wallet service providers would not be able to add new businesses, customers, or coins to their platform. They would also have to post notices regarding their registration status.